The great distract-a-thon continues

The media’s bubble-banter goes on at full pace, but when you look at what the RBA is actually saying, they’re not worried about a bubble. They don’t even think the market is particularly expensive…

The Australian media’s fascination with a bubble is one part laziness, one part incompetence, and 3 parts deliberate deception.

The reports about the RBA’s announcement last week that they’re considering macro-prudential policies continues to be reported under the banner of a bubble. This headline from the SMH over the weekend summed it up:

“Bubble-busting: macroprudential for home loans explained”

And repeat a lie long enough it becomes truth. Property Observer (who could never be accused of being anti-property) ran with the heading last week:

“RBA’s bubble warning doesn’t apply to South East Queensland”

I know I’m pushing shit up a hill with a tennis racquet, but let me say it again so at least my readers know the truth.

There is NO BUBBLE.

The RBA DID NOT ISSUE a ‘bubble warning.

The RBA IS NOT WORRIED about a bubble.

But to understand this, you’d actually need to do some journalism. Not any risky, wearing a wire to a meeting with the mafia kind of journalism.

No nothing like that. All you’d have to do is actually read what the RBA said. It looks like almost none of the reporters have done this.

For your benefit, I picked it apart last week here. I know a lot of you probably missed it with the long weekend, but then on Friday I laid out why I thought the media bias actually reflected a deliberate cover-up by the banks. (I expect I should win an award for investigative journalism for this one. It doesn’t look like the competition’s that tough.)

The short of it is that the RBA isn’t worried about a bubble. They’re not worried about house prices. They’re worried about banks’ lending practices, and if they might be slipping below the grade.

So what does the RBA actually think about house prices?

Well, Assistant Governor Malcom Edey fronted the government Inquiry into Affordable housing late last week to spell out the RBA’s official line.

What’d he say? Here’s the high-lights…

“A useful summary measure (of affordability) is the repayment on a typical new housing loan expressed as a ratio to disposable income. On that metric, housing affordability in Australia has fluctuated around a broadly stable average over the past three decades, with average repayments varying between around 20 and 30 per cent of disposable incomes…

…To summarise these stylised facts:

the ratio of housing prices to incomes is at the top of its historical range; but

over time, this has been more than offset by falls in financing costs, so that the typical repayment burden as a share of income is not particularly high. This of course does not rule out affordability problems in particular market segments or for particular types of households.”

So he’s saying sure, compared to income, house prices are a little bit expensive. But they’re not out of line with historical averages, and on these measures, there have been times when they’ve been more expensive in the past.

What’s more, over the past three decades we’ve had a massive opening up of the financial sector and falling interest rates, so credit has become a lot cheaper.

The fall in the cost of credit has been bigger the rise in house prices, so the net effect is that “the typical repayment burden… is not particularly high.”

Noticed how he used the word ‘bubble’ to describe house prices?

No?

Neither did I.

Not only is there no bubble, but as far as the RBA’s concerned, house prices aren’t even that expensive.

Sure, it might be tough for ‘some segments’ – first home buyers or lower-income households. But the market as a whole doesn’t appear to be expensive.

So how can there be a bubble in a market that isn’t expensive?

There can’t. If the RBA isn’t worried about the market being a tad expensive, then they can’t be worried about a bubble.

Therefore, THE RBA IS NOT WORRIED ABOUT A BUBBLE!

(am I going blue in the face?)

Is the RBA worried about anything? Well they’ve got their eye on the banks as I said, but they’re also worried about supply over the longer run.

… supply factors are critically important. It is the supply response that determines the extent to which additional demand results in higher prices over time.

Our submission highlights that Australia faces a number of longstanding challenges in this area, including regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry. There are also obstacles to affordable housing created by Australia's unusually low-density urban structure, though this is gradually changing.

…The general point I would make is that we can't improve housing affordability simply by adding to demand… without a supply-side response, any generalised increase in demand will just be capitalised into prices.”

Exactly right. I’ve made this point more than once. There is a policy-bias across the political spectrum to try and cover over affordability problems caused by a lack of supply, by simply throwing money at certain buyers segments (First Home Owner Grants etc.)
But unless supply increases as well, all you get is a rise in prices. But I don’t reckon we’ve seen the last of them (look out for plans to allow FHBs to dip into their super for a deposit), or the last of policy-induced price rises.

But that’s a story for another day.

The key take home is that the RBA is not worried about a bubble. The don’t even think that the market’s expensive.

Comments

Jon, I’m not sure that this “is or isn’t it a bubble” obsession is helpful.

More importantly, surely you agree tho that housing in Australia is expensive.

And this notion that housing is expensive, and is hurting Australia’s competitiveness, and is creating generational inequity is something we should be discussing, and examining closely.

Jon, how would you start today? Imagine having to stump up 800K for a very very average house in Sydney as a first home buyer?? How would you do that?

I am concerned that boomers have been given sooooo much equity from the housing gods, that they have forgotten what it would be like to actually have to save 100K in real actual cash, from a wage or business….

My good (24 years older) friend, bought his first house on 800 sqm, 5 km from the cbd in Adelaide about 30 years ago for circa 30K.

At the time he was in a very average job with the CBA, no degree of course: he left school at the end of year 11….. Just a very average basic white collar job, earning a very representative, very average 15k a year.

So his first house, cost him 2 years earnings.

Today that house is worth 800K, or 14 times the annual earnings of an equivalent job to what he had, today.

So how do u think that is reasonable?????

He gets to buy his first house for 2 times his wage.

Along the way, he is given 770K for doing nothing, which is the basis for all of his wealth today.

I have to pay 14 times the average wage, to buy the VERY SAME house (nothing to do with i want everything now blah blah blah… we are talking about the same house… like for like…..)

How is it that u can possibly say that we don’t have a problem here?? That housing is not expensive??

Also, my Dad bought for a house pretty much the same price (it was 28k but back in 1975). He needed a 50% deposit and had to pay a ‘mortgage broker’ $1k to make it happen.

That house today is worth around $350k, but we don’t need a $175k deposit or to pay a broker $12,500 to get the loan. You have a couple where they both work and they need to save around $50k for a 10% deposit and 5% of costs. Some mortgage brokers now pay you! This 50k would take two people on the average wage of 60k+ around 2-3 years to save, which is basically the same amount of time it took my average wage Dad back in the 70’s.

My point is it’s much more complicated than a simple multiple of income.

I hear what you’re saying Mark. It is always important to draw that distinction between ‘expensive’ and ‘bubble’ – something the media almost never does.
And i would agree that some housing is expensive. Partly that’s about quality improvements and the fact that we expect a lot more from our housing these days, but I think mostly it’s just what happens when you restrict supply the way we have. And I think it is fair enough to ask the question, are we happy with these market outcomes? Are they working for us as a society? But to fully answer that question, you need to balance the needs of first home buyers, home-owners, retirees, investors, the environment and our quality of life etc. I’ve tried to bring a bit of that complexity to my blogs (I’ve written about all of them in the past.) I don’t have all the answers, but I’m sure that simply saying, poor FHBs, lets throw some money at them, just isn’t a solid basis for good policy.

And I can see for sure that its hard for first home buyers to get in on the property ladder – and through conventional routes, maybe impossible. But there are options if you have the knowledge and are willing to get a bit creative with it. Dymphna Boholt, Bob Andersen and Mark Rolton for example all have some ‘no money down’ strategies. They won’t suit everyone, but I’ve seen a lot of people get their foot in the door this way.
The truth of it is that it is a rigged game. But when you know how the rigging works, you can maybe turn the tables to your advantage.

Agree with Jon. There are ways for anyone to get into the market. FHB can Vendor Finance into their first Home with $15-20k, allow for price growth and get their own loan down the track. I’ve seen it work very well with lots of people that don’t have a 10% or 20% deposit. People are often closed to one way – traditional way (thru banks), but Vendor Finance was huge before my time – 40+ years ago.

Policy induced price hikes: negative gearing. Police makers all have investment properties so they push up prices by fhbg, negative gearing. Etc.The current affordability is far worsethan befor. I have teaching young people to move to America

Governments don’t want more land releases, it means people are less inclined to pay the higher asking price, (de beers do this with diamonds). People are paying more in stamp duty on higher priced homes in established areas. Why flood the market with new land releases where the cost of the infrastructure is expensive?

One point which I have not heard mentioned yet, is the effect of the demographic change of having more married women remaining in the workforce. Earlier generations expected women to stay at home, with the father bringing home the bacon. With two salaries, modern families have been able to “afford” higher-priced homes – forcing up market prices. Add to this firstly the effect of negative gearing – making investment properties more affordable than owner occupation. Then SMSFs being able to invest in property, for the long term, and the influx of foreign capital into our domestic property market, together force prices higher and higher.
Despite these hurdles, there are still many FHBs bright enough and determined enough to buy. Unfortunately, our education system is so skewed towards producing cannon fodder for the labour market, that education for life has been grossly neglected. People are lucky indeed, if they have families which make up for the shortcoming of the school systems.
As Dymphna Boholt has said on many occasions, a couple’s first property purchase should not be for their “Dream Home”. It may even not be their own home. An investment property in an area with good prospects for growth and high occupancy rates, after utilising depreciation and negative gearing tax advantages, can be more beneficial in establishing a foothold in the market – especially if Mum & Dad can put up with extras staying on at home!!! Failing that, a few years of renting in a more economical area can still allow wealth to be accumulated in an investment property.

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